The Treasury Department and Internal Revenue Service have no authority to
limit the tax-free nature of life insurance death benefits related to a
split-dollar contract, industry representatives say.

"The Treasury Department cannot by fiat simply read a provision out of the
Internal Revenue Code," says Albert J. "Bud" Schiff, president
of the Association for Advanced Life Underwriting, Falls
Church, Va.

"Nor can it impose by regulation a limitation on the statutory death
benefit exclusion when the underlying statute has not granted the authority to
impose such a limitation," Schiff says in testimony before the Department
and the IRS on a recently proposed rule on split-dollar.

Schiff spoke on behalf of AALU and the National Association of Insurance and
Financial Advisors, Falls Church, Va.

The controversy surrounds a statement in the proposed rule, which was issued on
July 9, 2002, which says
that the death benefit from a split-dollar policy is excludable under Section
101(a) of the tax code only to the extent that the amount is allocable to
current life insurance protection under the contract.

Laurie D. Lewis, chief counsel for federal taxes with the American Council of
Life Insurers, Washington, says there is no statutory exception to the Section
101(a) exclusion of benefits receive under a life insurance contract.

"We fail to understand how proposed regulations could attempt to tax
amounts that are expressly excluded from gross income under the statute,"
Lewis says.

The testimony came at a hearing on the proposed split-dollar regulation.

The complicated proposal seeks to tax split-dollar arrangements under one of
two mutually exclusive regimes.

Under the "economic benefits regime," the owner of the life insurance
contract is treated as providing economic benefits to the nonowner, and those
benefits must be fully and consistently accounted for.

Under the "loan regime," the nonowner is treated as loaning premium
payments to the owner, and certain tax requirements applying to loans will
govern the agreement.

Lewis, however, questions the mandatory nature of the mutually exclusive regimes.

Parties to a split-dollar arrangment should be allowed to elect whether to be
taxed under the economic benefit regime or the loan regime, Lewis says.

She also questions the artificial division of the parties to a split-dollar
arrangement as "owners" and "nonowners."

A split-dollar arrangement, Lewis says, is one in which two or more parties
agree to share the costs and benefits of a life insurance policy.

The manner in which the parties share these different rights may vary from
arrangement to arrangement, she says.

The proposed treatment of parties as either "owners" or
"nonowners" should be withdrawn, Lewis says.

In other news, group life insurance may qualify for federal assistance for
losses caused by acts of terrorism under the recent agreement on terrorism
insurance legislation hammered out between the White House and Congressional
negotiators.

Under the agreement, the Treasury Secretary will conduct a study on the
availability of group life insurance.

Based on the results of the study, the Secretary will have the authority to
allow group life to participate in the program.

Under the program, insurance companies would have to pay a certain amount in
claims before the federal assistance would kick in.

The amount is based on a percentage of direct written premium from the previous
calendar year. The percentages are 7% in the first year, 10% in the second year
and 15% in the third year.

Above that deductible amount, the federal government will pay 90% of losses
while the insurance company would pay 10%.

However, insurance companies would have to repay the government for any
assistance up to $10 billion in losses in the first year, $12.5 billion in the
second year and $15 billion in the third year.

Insurance companies would be allowed to cover the costs of the repayment
through a surcharge on policyholders, but the surcharge could not exceed 3% of
the premium paid.

Insurance companies would have to disclose to policyholders the premiums they
charge for terrorism coverage and the existence of the federal backstop.

In addition, states will retain full authority to disapprove rates that violate
state laws.

The program would be capped at $100 billion. Above that amount, Congress would
have to determine what to do next.

At press time, the agreement remained surrounded by controversy, especially
over its tort provisions.

Under the agreement, all tort claims will be consolidated in a federal court,
but the cases will be adjudicated based on the tort law of the state where a
terrorist attack occurs.

This means that plaintiffs may be able to collect punitive damages from U.S.
businesses.

This has drawn sharp criticism from some Republicans, who charge that the White
House caved in to Democrats on liability issues.

At press time, House Republicans still had not signed the conference report.

Senate Majority Leader Tom Daschle, D-S.D., last week sent a letter to
President Bush urging him to pressure House Republicans into signing the
agreement, charging that they are creating a logjam that is preventing him from
moving the legislation through the Senate.